The Trouble With App Install Ads

App install ads may be a lucrative product for Facebook, Google and other vendors, but they’re becoming too expensive for app developers, especially since scaling is still a problem for the units.

“We found it difficult to acquire new users on mobile devices because it’s super expensive,” said Kenny Rosenblatt, founder and CEO of Arkadium (creator of the game "Release the Ninja") during a panel discussion at APPNATION NYC on Wednesday. “A lot of games don’t make the money back in their life time value versus what you spend to acquire users.”

The cost of acquiring new mobile users continues to grow. According to mobile app analytics firm Fiksu, the average cost of acquiring a loyal user (i.e., someone who opens an app at least three times) through marketing campaigns rose from $1.30 in 2012 to $1.62 in 2013.

But not all app developers have a large network of existing users or the resources to purchase install ads, said Dave Madden, SVP of advertising solutions at console and mobile game developer Electronic Arts.

“The big trend is for everyone to have an app install/discovery business model … (and) the price of app discovery may go down as supply goes up,” he said. “But right now it’s difficult for independent developers to cut through.”

Growth has slowed even for mobile gaming giant King.com, which pushes its "Candy Crush Saga" title and other games through install ads.

Although King generated $606.7 million in Q1 revenue, nearly triple what the company earned a year ago, and its daily active users jumped from 36 million a year ago to 143 million, gross bookings (the amount of money spent by users) for "Candy Crush Saga," its flagship game, declined.

"Candy Crush Saga" accounted for 67% of its gross bookings during the Q1, down from 78% in Q4 2013. And King.com’s shares sank since it started trading at $20.50 in March. The company’s stock hovered at about $16.08 in after-hours trading Wednesday.

However, Forrester Research analyst Jennifer Wise believes developers will continue to pay for ads. “I think that ads for apps will persist because that’s the right audience, and in-app ads today for other apps do drive a higher measurable response than branded messages today,” she said.

Wise also noted that engagement ads are important. “Just because ads can drive downloads doesn't mean that 1) the app itself is succeeding, or 2) the value from that user is substantial enough to justify ad spend,” Wise added. “Therefore, to maintain the value of an app, it makes sense for marketers to focus on app-engagement ads.”

Rewarding users with extra lives in exchange for watching a video or driving in-app purchases are popular strategies for boosting engagement. Brands could also be involved by sponsoring the rewards.

But there is only so much developers can do to push engagement levels before users are turned off. Scaling brand-sponsored rewards, for example, is a challenge since publishers don’t want to overwhelm users with ads, Madden said.

“Rewards can make users feel good about a brand,” he said. “But we have to take care of the player first and focus on the user experience.”